Hey guys, My colleague Brandon Rith (formerly a Fidelity FINRA instructor) and I put together a post for college students looking to learn about Options: https://blog.achievable.me/2019/02/28/5-basics-of-options-in-5-minutes/ Wanted to get your feedback: how did we do? I was aiming for a strong intro to the concept since options are such a common roadblock for new FAs / traders. Thank you, Tyler
#4 -- lose the part about "lose $10". You only lose the purchase price; you're follow-on comments try to correct this. In general, though: Do The 3 Basics of Options in 3 Minutes: #1: Options are insurance: -- a right to buy cheaper (like a sale coupon) on top. -- a right to sell higher (like accident insurance on your car) on bottom. #2 The premium you pay for that insurance is primarily affected by -- the length of time it's good (more time→more $$$) -- the distance of the insured price to the desired market price (call insurance↓ with higher price, put insurance↓ with lower price) -- the expected jitters ("volatility") of the market at that time. (more volatility→more $$$) #3 Since options buy&sell insurance, then also, options buy&sell risk. Thus understanding the 4 option risk graphs clarifies all sorts of questions... ((That was fun. ))
It would be slightly more descriptive and accurate, at least the way options are used in "real life" to say: Selling a Call (Short) = Bearish to Neutral, and Selling a Put (Short) = Bullish to Neutral. At least in my simple little mind.
Thank you Tommy, this explanation and graphic are a lot clearer! Would you be interested in having us include this graphic in our post? Or I can make a modified version that is 'original' if you prefer. I just want to make sure we have the best description possible. And we will credit you too, of course (LMK if you have a website or something you want credited more than tommcginnis)
Wow -- high compliments, guys. Thank you, truly. Tyler, the graphic was pulled from a web search -- I just pulled a url from: https://powerprofittrades.com/wp-content/uploads/2016/07/risk-graph.jpg And I would tweak/clarify #2, so's the whole thing reads Do The 3 Basics of Options in 3 Minutes: #1: Options are insurance: -- a right to buy cheaper (like a sale coupon) on top. -- a right to sell higher (like accident insurance on your car) on bottom. #2 The insurance premium you pay is primarily affected by -- the length of time it's good (more time→more $$$) -- the distance of the insured price to the current market price (call insurance↓ with higher insured price, put insurance↓ with lower insured price) -- the expected jitters ("volatility") of the market at that time. (more volatility→more $$$) #3 Since options buy&sell insurance, then also, options buy&sell risk. Thus understanding the 4 option risk graphs clarifies all sorts of questions: No matter how complex or fancy an option trade/strategy might appear, it only boils down to an application of the 4 option risk graphs below. (("Phew!" I feel much better now.))
I am truly impressed. You must be teaching finance somewhere, to be able to distill into such simple terms.